I follow a blog called Calculated Risk. It has been one of my go-to blogs for over a decade. I don’t necessarily agree with Bill McBride on various points, but he generally knows his stuff and has been one of the better finance/econ blogs over the years. One topic Bill McBride has covered over periodically is the debt ceiling. He’s often been a voice of relative calm whenever the matter comes up, given all the “sky is falling” talk that usually surrounds any debt ceiling vote. Usually his bottom line is, “no worries.” Where is he at now?
My reading of his most recent posts is “no worries (probably).” Yesterday, he posted a few clips from Goldman Sachs’ analysis:
What happens if Congress does not raise it in time?
Scheduled federal payments would be delayed and financial markets would be disrupted. The primary consequence of a failure to raise the debt limit before October 2 would be a likely failure to make some payments on that day or soon thereafter. This could include, for example, the main monthly payment to Social Security beneficiaries, which occurs on the 3rd of every month. All told, the decline in federal payments that would be necessary to avoid breaching the debt limit would be roughly equal to the budget deficit, resulting in a temporary fiscal contraction of 3-4% of GDP for the period the debt limit is binding. A sharp decline like this would likely be disruptive to financial markets and could have consequences for the real economy, which is why Congress has managed to avoid such an outcome in the past.
Note that was prefaced with their expectation that Congress will take at least til 29 September to raise the debt ceiling (about the time the US would begin to default on its debts).
Today, he takes a few clips from a recent post by Paul Krugman:
I]t looks fairly likely that by October or so there will come a day when the U.S. government stops paying some of its bills, including interest on debt.
How bad will that be? The truth is that we don’t know …
…
Suppose that everyone expected normal payments to resume, with back interest, in a couple of weeks. In that case, even a slight discount on, say, Treasury bills would make them a very good investment — so speculators would basically step in and support the value of U.S. debt despite temporary default. In that case default might not be that big a deal.The big problem would come if investors see the default as more than a temporary glitch — if they see it as a sign of enduring, critical dysfunction in American governance. In that case they wouldn’t necessarily step in to buy our debt, and their confidence in the whole economic edifice would take a severe hit.
And of course with that severe hit, we can imagine some severe long term repercussions that we clearly do not want. Now this issue has come up periodically, and after the usual game of chicken gets played, the necessary (but stupid) vote to raise the debt ceiling happens. There are still ideologues who are convinced that default would not be a bad thing. Here is McBride from 2014 saying something that is as true now as it was then:
Note: There are certain politicians who think it is OK to not pay the bills as long as the U.S. makes interest and principal payments on the debt. That is crazy talk. There is a name for people who don’t pay their bills: deadbeats. If politicians don’t pay their personal bills, they are deadbeats. But if they stop the government from paying the bills, we are all deadbeats. And there will be serious economic consequences for not paying the bills on time. The consequences will build over time, but in a few months, not “paying the bills” will ripple through the entire economy.
Last year I pointed out that the election impact of a partial government shutdown would probably be minimal. BUT if Congress stopped paying the bills, people would remember. It was Republican Senator Mitch McConnell who said in 2011, if the debt ceiling isn’t raised the “Republican brand” would become toxic and synonymous with fiscal irresponsibility.
One area where I have consistently agreed with McBride’s judgment is that the whole debt ceiling idea is ridiculous anyway, and that Congress should just vote to do away with it altogether. The debt ceiling is just about posturing and nothing more. In that sense, it would be wise for the opposition party, or at the very least some members in the House and Senate, to call out the charade for what it is and demand that the debt ceiling be abolished. I hold no hope that such a proposition would be passed. It would make a statement that the last minute posturing that happens each time we run up against the debt ceiling is irresponsible, every bit as much as is the risk of failing to pay our bills as a nation.
My guess is that cooler heads will prevail (once again) and that a clean debt ceiling increase will get passed. Regrettably, the can will be kicked down the road a bit further, until the next debt ceiling crisis occurs. Wash, rinse, repeat, until we can finally get a majority of Congresscritters who will do what should have been done long ago and do away with the debt ceiling once and for all. In the meantime – probably no worries.
